The Importance of Getting out of Debt

The Importance of Getting out of Debt

In my last post I urged you all to start saving for retirement. I even did some math to show that one of the best things you can do is to start saving in an investment account as soon as possible. Even if you have debt, I explained, starting the Roth IRA now will lead to great advantages upon retirement.

However I would like to expand my analysis a bit.

My friend Will has recently turned me on to Dave Ramsey. Dave Ramsey is one of the leaders of the financial ideology that promotes the Judeo-Christian-Muslim idea of living a debt free life. Will and Dave Ramsey have pointed out that there are several benefits to first getting completely out of debt and then saving for retirement. I think they would also agree with my post against Credit Cards.

Hedge Against Job Loss

First, Will and Dave point out that if one pays off debt first and builds up a little emergency fund then a hedge against job and income loss is formed. The essential thing is that while times are good, there is plenty of money to pay back loans and monthly expenses. However when times are bad, there is no money to pay back debts which always have to be paid back. As Dave notes: Most Americans are about three pay checks away from bankruptcy.

Let No Man Be Your Master

Second, Will and Dave point out that when you are indebted to someone, you are also enslaved to them in some fashion. Have you ever thought to yourself, "Gosh I would sure love to do X, but in order to pay back my debts I have to have a job and I can't do X and have a job at the same time :-/ " ? If you have, you know what it means to be a slave to your creditor.

Psychological Freedom

While it may be true that some folks can borrow and borrow and eventually go into bankruptcy and never feel any remorse, guilt or shame, most of us feel a sort of a shadow hanging over us when we go into debt. I personally have anxiety and much doubt when I go to sign for a loan or put a good bit of cash on credit card. This psychological/spiritual burden is so prominent that Dave Ramsey actually has his callers who have just completed their debt payments shout at the top of their lungs, "I'm debt freee!!!"

So while it may be true that one can end up with slightly more money at retirement by first investing in retirement and then paying off debt, there are several great advantages to being out of debt as fast as possible: hedging against income loss, an end to financial slavery, and psychological freedom.